It’s no secret that car insurance can be expensive. Some people have a difficult time coming up with a full six month or one-year policy up front. This is especially true for young drivers, inexperienced drivers, and drivers with an accident history or traffic violations. However, there are a lot of things to consider when you make the decision to pay in full or monthly for your car insurance.
Advantages and Disadvantages of Paying In Full
When you pay your car insurance in full, you save quite a bit of money over paying monthly. In addition, you do not have to worry about paying a monthly bill or your car insurance lapsing due to forgetting to make a payment. Paying car insurance in full can also be beneficial if you have poor credit, as your credit score often comes into play with monthly payments.
However, when you pay your car insurance in full it could cost thousands of dollars up front. Many people do not have the funds available to do this. Paying for a full year of car insurance can also be problematic if you believe you may move to another state or switch car insurance companies before the term is over. If you cancel your car insurance when you have paid up front for your premium, it could take several weeks to get reimbursed for the unused portion of your premiums.
Paying by the Month is Not an Easy Calculation
You may think that if you pay your car insurance by the month that you are going to make 12 even monthly payments equaling the annual premium you are quoted by the car insurance company. However, this is not the case.
Most car insurance companies that allow you to make monthly payments charge additional fees for paying by the month instead of in full. You may also be required to pay interest, because the annual premium amount is considered a loan that you are repaying by the month. How much it will cost you to pay by the month depends largely on the car insurance company and how they calculate interest and fees. You could wind up paying up to 20 percent more for your car insurance term if you pay by the month.
When Credit Comes Into Play
Because some car insurance companies consider your car insurance premium to be a loan you are paying back monthly, your credit could play a role in qualifying for car insurance. Your monthly payment could be at least in part based on your credit score. You may also be denied a policy for monthly payments if your credit score is too low, especially if you have a lot of collections on your credit report.
What You Pay Up Front
When you get car insurance by the month, you will typically pay more as a down payment on your policy than your monthly payments. Many car insurance companies that allow for monthly payments charge 20 percent of the total cost of the policy as a down payment, with the remaining payments spread out over the following 5 or 11 months. You usually have one or two months at the end of the policy period without a payment to allow you to prepay the 20 percent down payment for the next policy term.
Another downside to paying your car insurance monthly instead of in full is that many car insurance companies require you to use a checking account to pay your monthly premiums. These companies require you to use automatic withdrawals from a valid checking account. This can be difficult to manage if you are on a tight budget or don’t get paid at the same time each month. It can also mean that if you don’t have a traditional checking account with checks, you are unable to pay your car insurance on a monthly basis.
What is Best?
If you can afford to do it, paying your car insurance in full for the six month or annual period is the best option. You will get the best rates and you will pay the least amount of money. You will also have more options, as not every car insurance company offers monthly payments. However, if you are unable to pay in full, monthly installments allow you to get the car insurance that you need to be legal to drive.